Stock X has a 10% expected return, a beta coefficient of0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return,a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and themarket risk premium is 5%.a. Calculate each stock’s coefficient of variation.b. Which stock is riskier for a diversified investor?c. Calculate each stock’s required rate of return.d. On the basis of the two stocks’ expected and required returns, which stock would bemore attractive to a diversified investor?e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and$2,500 invested in Stock Y.f. If the market risk premium increased to 6%, which of the two stocks would have thelarger increase in its required return?

Question

Stock X has a 10% expected return, a beta coefficient of
0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return,
a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the
market risk premium is 5%.
a. Calculate each stock’s coefficient of variation.
b. Which stock is riskier for a diversified investor?
c. Calculate each stock’s required rate of return.
d. On the basis of the two stocks’ expected and required returns, which stock would be
more attractive to a diversified investor?
e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and
$2,500 invested in Stock Y.
f. If the market risk premium increased to 6%, which of the two stocks would have the
larger increase in its required return?

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